Wholesale disaster in retail trade

04 October 2012
Published at
The News

Imagine a society where 80 percent of all grocery sales are monopolised by just five giant retailers like Walmart, Tesco and Carrefour, locally grown fresh food is largely replaced by processed, low-nutrition plastic-packaged items, and heterogeneity of attire based on traditional and ethnic fabrics is gradually destroyed.

 Such domination of “consumer choice” by a handful of corporate brands and logos resembles what most South Asians would consider a nightmare because of the artificial, chemicals- and energy-intensive products involved. But it’s not very far from what has happened in much of Western Europe and North America over the past 30 years, especially as regards groceries and clothes, and, increasingly, fruits and vegetables.

 Yet, that’s the trajectory on to which Prime Minister Manmohan Singh has forced India by permitting 51 percent foreign direct investment in multi-brand retail. This is part of his strategy to boost GDP growth by feeding the “animal spirits” of entrepreneurs, in this case transnational corporations (TNCs) like Walmart, among the world’s most hated companies.

 This decision, postponed last November because of internal dissent and fear of a popular backlash, is one of the most insidiously destructive economic measures ever taken in India. It will undermine the livelihoods of millions of petty traders, kirana shop-owners, street vendors, hawker and dirt-poor kabari-walas who contribute greatly to society by recycling waste and reducing carbon-dioxide emissions, which cause dangerous climate change. Its benefits will be minuscule, and limited to TNCs and India’s shopping-mall-addicted urban elite.

 The decision is rooted in the bravado of a leader who scarcely cares for his own people, especially the poor, but is deeply ashamed at being called an “underachiever” by the West. So he has signalled his unwavering commitment to serving the interests of TNCs through neoliberal policies, just as these stand utterly discredited globally.

 Manmohan Singh will make not just the ruling alliance, but the Indian nation, pay a heavy price for his bravado. The Congress Party, which is foolishly indulging him, will soon find that he has become an even greater political liability than before. He has wantonly provoked the Trinamool Congress to walk out of the UPA and weakened his own government’s credibility.

 The arguments cited by the government for opening up retail trade to TNC-owned supermarket chains are wrong, if not dishonest as well, including creation of new jobs, elimination of middlemen, better prices for farmers, and benefits to consumers. Experience in Thailand, Malaysia, Indonesia and Brazil confirms this.

 India’s retail and wholesale trade has a turnover of about $450 billion and employs 44 million people. Walmart has a comparable global turnover ($420 billion), but employs only 2.1 million people. For each new job it creates in India, at least 17 workers will lose employment. Given the large economies of scale in organised retail, new job generation would be puny. The managing director of German trader Metro Cash&Carry, which runs 11 large wholesale outlets in India, admits this.

 India’s experience with organised retail, recently opened up to domestic corporations like Big Bazaar and Reliance, demonstrates the harm caused to some of the most vulnerable people of the country. Corporate retailers routinely resort to predatory or below-cost pricing to attract customers initially-only to jack up prices later.

 TNCs have deep pockets and can absorb big initial losses. They will only increase excessive concentration and non-competitive practices. They won’t eliminate middlemen, but introduce new ones, such as buying agents, processors, packagers, quality checkers, certification firms and all kinds of corporate consultants.

 Farmers and other suppliers will become vulnerable to manipulative and monopolistic practices of TNC chains vis-a-vis which they have little bargaining power. TNCs can beat them down on prices through harsh negotiations and threats of delisting.

 Fears of abuse of the “buyer power” of giant retailers aren’t imaginary. A report by the Netherlands-based Centre for Research on Multinational Corporations shows widespread abuse in the European Union. Supermarket chains reduce “the number of suppliers to a few or just one” and require that they “do not sell at lower prices to competitors.” They extract the lowest possible prices from suppliers, while imposing all kinds of fees and extra payments on them.

 These include “retroactive payments,” such as costs of advertisements and renewal of stores, “sometimes outside contractual arrangements,” listing fees and slotting fees, and “late payments which enable supermarkets to gain profits at the expense of suppliers.”

These can add up to a high 50 percent of suppliers’ revenues in Italy, and 70 percent in France, often leading to their ruin. “This survey found that small and medium enterprises in the food sector and farmers have been especially vulnerable.” So much for a fair deal!

 Many supermarket chains sell goods under “private labels,” that is, products with their own brand labels. This is claimed as a new opportunity for suppliers. But supermarkets can threaten both branded product suppliers and “private label” producers with delisting. Supermarkets alone decide “what products are sold on the shelves” and hold all the trump cards. So “private labels” have become “an important additional element” of abuse-capable “buyer power.”

 Many European countries have over the years witnessed a serious reduction in the number of “small independent retail stores as well as independent wholesalers, and a lack of opportunity for them to expand due to the collective dominance of a few supermarket chains. It has also resulted in growing concentration of buying arrangements...”

 In the long run, “buyer power” affects consumer interests – not least through “decreasing choice and quality of products, lack of food available in local neighbourhoods, decreasing innovation of products for consumers, and increasing dependence on private labels.” No wonder supermarket prices, initially pitched low, soon catch up with open-market levels and overtake them to the extent of 20 to 30 percent, as the evidence from the West demonstrates.

This evidence also suggests that it’s impossible to secure compliance with conditions such as 30 percent sourcing from small-scale industries. Under World Trade Organisation rules, these cannot be limited to national producers. In India, the condition has been diluted to favour Swedish home furnishings retailer Ikea.

Consumers will have less and less choice as supermarket concentration grows and the number of viable chains falls. When only a few buyers dominate the retail market, monopolies get formed quickly, allowing them to dictate terms. The giant retailers can raise their profit margins and also resort to more and more unfair labour and industrial relations practices for which they are already notorious, including anti-union policies, ultra-low wages, and use of prison/bonded labour.

They can increasingly source consumer durables like electronic goods from companies like Foxconn, which runs 13 factories in China amidst appalling working conditions, such as a 12-hour working day with a six-day week. Why, some of their Indian collaborators would be only too willing to supply similar products at ultra-low prices, while demanding “liberalisation” of labour laws so they become “competitive” with Foxconn. This would spell a race to the bottom-and great social retrogression.

So, at the end of the day, Manmohan Singh’s FDI-in-retail policy will have achieved not higher GDP growth-the rise will probably be marginal-but large-scale destruction of livelihoods, and greater depredation on some of India’s most underprivileged people.


Photo from the World Economic Forum